US Mint Bullion-Coin Sales 5

Gold's first new bull market since 2011 last year was overwhelmingly driven
by stock investors flooding into gold ETFs. Traditional physical bar-and-coin
demand was actually quite weak, falling considerably year-over-year. Nevertheless,
it's still important to stay abreast of classic gold and silver investment
demand. One key microcosm of that comes in the form of the US Mint's sales
of its popular American Eagle coins.

When American investors buy physical gold and silver bullion, it's often in
the form of these American Eagle 1-ounce coins. They have a really interesting
history. Back in the early 1980s, foreign national gold coins led by South
Africa's famous Krugerrand were soaring in popularity. The US Congress didn't
want the States to be left out of the prestigious national-gold-coin business,
so it finally acted in 1985.

American lawmakers crafted the Gold Bullion Coin Act of 1985, which president
Ronald Reagan then promptly signed into law. It mandated the US Mint start
producing a family of 22-karat gold-bullion coins containing one, one-half,
one-quarter, and one-tenth of a troy ounce of fine gold. There were a couple
of interesting restrictions, including the origin and age of the gold and the
amount of coins to be produced.

The GBCA required all gold-bullion coins to be minted from "gold mined from
natural deposits in the United States, or in a territory or possession of the
United States, within one year after the month in which the ore from which
it is derived was mined." If that source ever proved insufficient, the Mint
could "use gold from reserves held by the United States to mint the coins".
It makes sense to support American miners.

But far more importantly, this law requires the US Mint to produce these gold-bullion
coins "in quantities sufficient to meet public demand". Unfortunately the unaccountable
bureaucrats at the US Mint have failed miserably on this front, and should've
faced the wrath of Congress. There have been multiple times since the deep
secular-bear gold lows of the early 2000s where bullion-coin sales have been
suspended.

The most famous was probably in August 2008 heading into that year's stock
panic, when demand was growing. The US Mint claimed its suppliers couldn't
produce enough planchets, the blank flat disks of 22-karat gold that are ultimately
stamped into American Eagle coins. That ignited a firestorm among gold
conspiracy theorists, and went mainstream with a major Wall Street Journal
story published on page C1.

The US Mint's history of producing sufficient silver-Eagle coins to meet public
demand is even worse, with these popular coins rationed for as long as 18
months at a time. This was even a big problem in 2015, when these silver
coins' sales were severely restricted for the last 5 months of that year.
Because the US Mint has such an ongoing problem meeting demand as mandated,
its coin sales don't reflect true demand.

There are additional factors limiting the usefulness of this data for drawing
conclusions about broader gold investment demand. It's primarily American investors
buying these American Eagle bullion coins, effectively excluding the rest of
the world. On top of that, these coins are never destroyed. So the true supply
and demand in the marketplace encompasses the entire stockpile of coins
minted since 1986.

Nevertheless, the US Mint's sales of newly-produced bullion coins offer a
useful peripheral read into American gold and silver investment demand as long
as their limitations are kept in mind. This small piece of overall global gold
demand is a valuable barometer of American physical investment demand. Trends
within this dataset help illuminate broader trends in gold investment, which
dominates gold's price.

The US Mint doesn't sell coins directly to ordinary investors. Instead a network
of authorized purchasers acts as middle men, which have to be fairly-large
businesses to qualify. The US Mint's minimum order requirements for gold Eagles
and silver Eagles are 1k and 25k ounces. At current prices this equates to
order sizes of $1209k and $438k, not including the 3%-gold and $2-per-silver-coin
premiums the US Mint charges!

So buying American Eagles certainly isn't cheap for investors, who are forced
to eat these big wholesale premiums. And the retail coin dealers naturally
charge additional premiums on top of that to keep their businesses running.
Thus paying 5%+ over prevailing gold prices is common, which is very inefficient.
That's one reason why gold ETFs led by the flagship American GLD SPDR Gold
Shares have grown so popular.

Trading like any stock, GLD's commissions for purchasing shares are the usual
trivial broker fees. Then GLD's managers charge a 0.4%-of-assets fee annually
to pay their operating expenses including storing and transferring huge amounts
of physical gold bullion. GLD shares offer investors portfolio-diversifying
gold exposure for well under an order of magnitude cheaper than traditional
coins including gold Eagles.

Thus the rise of gold ETFs led by GLD has certainly cannibalized classic gold-coin
demand. There is no doubt physical gold ownership in one's own immediate possession
is far superior to gold-ETF shares in extreme market-breakdown situations.
But the vast majority of the time when markets are functioning normally, gold-ETF
shares offer the same portfolio-diversification benefits of gold coins at a
fraction of the cost.

So the investors still buying gold coins tend to be hardcore true believers.
They want to own gold for a long time, making the high premiums more palatable.
I amassed my core portfolio foundation of national gold coins including Eagles
in the early 2000s, and would never trade them for GLD shares. Gold held in
your own personal control is the ultimate insurance policy against devastating
black-swan events.

The US Mint's gold-Eagle sales offer insights into how the American physical
gold market dominated by traditional investors is faring. This chart superimposes
monthly gold-Eagle sales over gold prices since 2001. Since gold-Eagle production
and thus sales are highly volatile, annual averages are included in yellow
to smooth the trends. Provocatively gold-Eagle demand proved strong in 2016, defying
world precedent.

Last year the US Mint sold 985k ounces of gold Eagles to its wholesalers.
That was a major 22.9% jump over 2015's 802k ounces sold! Averaging
out to 81.5k ounces per month, 2016 was actually the fourth best year of gold-Eagle
coin sales in gold's modern secular-bull era. Only 2009, 2010, and 2011 were
better. Since the recent trough year for gold-Eagle sales in 2014, their monthly
average rocketed 86% higher!

Despite the gold
carnage seen in the wake of Trump's surprise election win, this metal
had a solid year in 2016. Gold rallied 8.5% higher last year, its first up
year since 2012's 7.0% gain. So it shouldn't be surprising that American
physical investors started to return to chase gold's young new bull. Investment
demand growth is inverted, with higher prices fueling higher demand
unlike normal commodities markets.

Provocatively these rising gold-Eagle sales really defied the world trend in
bar-and-coin demand. The definitive arbiter of gold fundamental data is the
venerable World Gold Council. It publishes awesome quarterly reports detailing
global gold supply and demand. Until Q4's report is finalized and published
in a couple weeks, the latest available is still Q3'16's. So we can analyze
the first three quarters of 2016.

American Eagle gold-bullion coin sales ran 692.5k ounces in the first 9 months
of 2016, which equates to just 21.5 metric tons. That was only a slight 3.4%
improvement from the 670.0k ounces or 20.8t seen in the first 9 months of 2015.
As this chart shows, the US Mint didn't start getting caught up with the surging
gold-investment demand in 2016 until Q4. Gold-Eagle sales exploded last quarter,
likely also on bargain hunting.

According to the World Gold Council, total global physical bar-and-coin demand
in the first three quarters of 2016 was 664.2t. Thus new US Mint gold-Eagle
sales are a vanishingly-small 3.2% of that. A subset of that bar-and-coin demand,
only official coins, ran 129.9t. New gold-Eagle sales accounted for about 1/6th
of that. But the surprising thing is gold-Eagle sales still rose year-over-year
in the first 9 months of 2016.

Overall world bar-and-coin demand excluding ETFs and central banks actually
fell 12.9% year-over-year in the first 9 months of 2016, from 762.9t
to 664.2t! So it's rather impressive to see new gold-Eagle sales buck that
trend. This big 98.8t YoY drop in bar-and-coin demand was far more than offset
by an epic 785.8t YoY surge in gold-ETF demand! That also outweighed falling
jewelry demand, driving overall demand higher.

The sole reason overall global gold demand climbed 7.4% or 229.8t YoY in the
first 9 months of 2016 was this massive
gold-ETF buying. And that overwhelmingly came from GLD alone, the world's
biggest-by-far and dominant gold ETF. Its holdings grew 305.6t in that span,
well exceeding the 229.8t growth in world gold demand! So realize new gold-Eagle
sales are almost inconsequential relative to the gold ETFs.

Still, it's very encouraging to see American investors' demand for new gold
Eagles defy the world bar-and-coin demand slump to rise year-over-year in
2016. That implies gold psychology is really improving. Investors don't want
to pay the high premiums to hold physical gold in their own possession unless
they think gold is going to climb on balance for years to come. Only true believers
go to the trouble of buying coins.

But despite the strong 2016 gold-Eagle demand in ounces terms, in dollar terms
it is still way down. At 2016's average gold price of $1250, the 985k ounces
of gold Eagles sold were worth about $1.2b. That is nothing in market terms,
a rounding error. Back in 2011 when gold averaged $1573, a similar 1000k ounces
of new gold Eagles sold were worth around $1.6b. But 2009 saw the biggest modern
gold-Eagle sales.

That year they ran a mammoth 1435k ounces, surging as gold soared emerging
from 2008's first stock panic in a century. But at 2009's average gold price
of $974, they were still only worth about $1.4b. So at $1.2b last year, new
gold-Eagle sales have lots of room to grow before they hit normal levels for
gold bull-market years. If the US Mint can keep up, odds are they will power
considerably higher again in 2017.

Arguably the smart thing to do if you own physical gold coins in your own
possession is to tell no one. If the wrong people hear you have substantial
gold bullion on your property, that makes you a target for theft. And since
gold is usually well-hidden, any thief thinking you had some would likely torture
you to get its location. Thankfully most gold investors tend to be well-armed
too, ready to defend with lethal force.

Security concerns aside, gold coins are a powerful evangelism tool to promote
gold investment. When I get the chance to speak to new investors or kids about
gold, I always bring a handful of gold Eagles to pass around. Portfolio diversification
through gold is a broad and abstract topic that is hard to grasp at first.
But when someone holds physical gold bullion in their own hands for the first
time ever, their faces light up!

All of a sudden gold transcends an academic concept to become tangible and
real. Decades ago when I was young, the same thing happened to me. My interest
in gold and contrarian investing grew out of a friend letting me actually
hold some gold coins. They happened to be South African Krugerrands, but the
timeless allure of gold is universal for all people. I hope the growing gold-Eagle
sales boost such opportunities.

While you don't want to advertise your physical-gold hoard, you can buy fractional
gold Eagles to gift on special occasions. You can show trusted close friends
the latest few Eagles you bought, and use that opportunity to tell them about
the vast
upside potential in gold. So while gold Eagles remain a small fraction
of world gold demand, their possible impact on gold psychology lets them punch
far above their weight.

For over 17 years now as a newsletter writer, I've strongly recommended every
investor amass a core portfolio foundation of at least 5% of investable
assets in physical gold and silver bullion held in their own immediate possession.
Eagles are a great way for Americans to do that. Physical gold and silver
is the ultimate portfolio insurance, protecting investors from various extreme
market or political situations.

While the odds are thankfully very small, there's always the chance that paper
markets could crash or be inaccessible indefinitely. When such black-swan events
smash the rest of your portfolio, your small gold allocation will soar and
offset some of those losses. Physical gold and silver you possess can also
be used for transactional purposes if severe market upheavals are accompanied
by disruptive real-world unrest.

Interestingly the increase in new gold-Eagle demand last year didn't translate
into higher silver-Eagle sales. This next chart looks at the US Mint's monthly
and annually-averaged silver-Eagle sales along with silver prices. They actually
fell rather sharply last year, which is somewhat surprising given silver's
15.1% gain in 2016. But the silver-Eagle market is really considerably different
from the gold-Eagle one.

Last year the US Mint sold 37.7m new silver-Eagle coins, down 19.8% from 2015's
47.0m. This pushed the monthly average sales down to 3.1m, the lowest seen
since 2012. That implies silver demand was weaker. Unfortunately world silver
fundamental data comparable to the World Gold Council's gold data isn't
available quarterly. It is only published once a year by the Silver Institute,
and that's not until May.

So unfortunately we can't do a silver-coin analysis on par with the gold-coin
analysis above. But silver Eagles are very different from gold Eagles. While
silver Eagles are certainly very beautiful and thus highly desirable, they
are an expensive way to own silver bullion. Once again the US Mint charges
the large wholesale dealers a whopping $2 per coin in premiums. At prevailing
silver prices, this is a staggering 11.4%!

Once the retail coin dealers take their cut on top of that, silver Eagles
are not an economic way to amass silver bullion. They make great gifts, but
serious silver investors generally don't bother with them since they are so
expensive. When building up core investment positions in both gold and silver
bullion, the prudent thing to do is buy the forms of these metals with the
lowest premiums to get the most bang for your buck.

Silver-Eagle demand is also exceedingly volatile. When silver surges and excitement
grows, the coin dealers often steer newer naive investors towards high-margin
silver Eagles. But as silver inevitably falls out of favor again, this demand
collapses. These big swings are impossible to forecast, making it very challenging
for the US Mint to achieve its Congressional mandate of producing sufficient
coins to meet demand.

2015 is a great recent example. Though silver-Eagle demand surged to record
highs that year, by July the US Mint had already run out of these coins thanks
to a strong early-year silver rally. So as the Mint struggled to catch up,
it actually had to ration silver-Eagle sales for 5 whole months! So
these new sales the Mint reports aren't necessarily a true reflection of investor
demand, but often reveal Mint limitations.

Silver actually acts as a gold sentiment gauge. Investors only start
getting excited about silver after gold has rallied long enough and far enough
to convince them its upside is sustainable. Gold embarked on a new bull market
in December 2015 out of deep secular lows, and powered 29.9% higher by early
July 2016. During that short 6.7-month span, silver surged up 47.7%. But a
half-year isn't much in the grand scheme.

The shift in investors' silver-coin demand from bear to bull levels will take
some time. Silver may have to rally on balance for a year or two before sustained
new demand kicks in. And the US Mint will take even longer to respond to that
demand shift, since it requires considerable lead time to source and fabricate
raw silver bullion into finished Silver Eagles. So I suspect 2017 will better
reflect growing demand than 2016.

Precious-metals physical-bullion demand among American investors should only
grow as gold and
silver mean revert higher this year and beyond. There's no doubt the US
Mint will be able to sell every last American Eagle coin it produces. Since
the Mint has to buy this gold and silver from American miners, all this bullion-coin
demand will certainly contribute to driving gold and silver prices higher as
well.

If you've never bought gold and silver bullion coins, it's a fantastic time
to get started and stockpiling with gold and silver prices still low. All you
have to do is find a reputable local coin dealer who's been in business a long
time and stop by to chat. He'll help you understand what kinds of coins are
available, and the premiums they command. Buy your coins, take them home, hide
them, and forget about them.

At Zeal we've always advocated physical-bullion foundations for every investment
portfolio. I started to recommend gold-bullion coins to our subscribers in
May 2001 when gold traded near $264, and silver-bullion coins in November 2001
when silver traded at $4.20. These long-term investments trounced the S&P
500 ever since, with gains still in the hundreds of percent even with
gold and silver relatively low today!

We've been in the contrarian-research business helping investors and speculators
thrive for over 17 years now. Since 2001 we've recommended and realized 906
stock trades in real-time to our newsletter subscribers. Their average annualized
realized gains including all losers are now running way up at +22.0%! You can
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The bottom line is US Mint bullion-coin sales were mixed in 2016. While gold-Eagle
sales surged with the new gold bull, silver-Eagle sales fell despite silver
following gold higher. American investors' gold-coin demand as evidenced by
new Eagle sales grew last year, bucking the world trend of weakening bar-and-coin
demand. The return of hardcore physical investors here in the US is very bullish
for gold.

It reflects improving gold psychology, as investors are more willing to pay
high gold-coin premiums that are far larger than gold-ETF fees. This only makes
sense if they expect gold to climb on balance for years to come in a major
new bull. As gold continues mean reverting higher out of recent years' deep
secular lows, global bar-and-coin demand should really start growing again.
Investors love chasing a winner.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
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